Basically the lender loans the developer enough to build the project, and then loans the developer the interest payment each month during the development phase.
Haha... this sounds like pure ponzi finance.
Any time the borrower has to borrow the interest payment then by definition that's exactly what you've got.
BTW they're building those 3 story economy type hotels everywhere around here (La Quinta, Hampton Inn, etc.). There's a new one going up on every street corner.
It's like somebody got a big can of hotel spray and is covering the city in it.
If the developer has a takeout in place and has skin in the game, I see no problem with this. It is a cash management tool.
That said, a lot of developement, mostly shopping centers, were built with a negative (near term) cap rate. The idea was to increase occupancy and rents over time while the real estate appreciated. That model is el busto.
It is possible for the FDIC to declare a loan non performing even when no payments have been missed. It is simply called a proforming, non proforming loan. It happened to me in 1990. FDIC can be rather doltish at times.
I don't see what's wrong with these interest reserves... they worked really well for Harry Macklowe. not to mention how well they've worked in residential real estate (option ARMs).
This would have happened to the bank of a client of mine who was having a house built on the west coast of Florida aka the inner circle of doom.
Tragically, his son in law was killed in a car accident, his daughter moved back to Florida's east coast, he couldn't find a decent job. He walked away, bought another house, credit was good while the Interest was being paid due to interest reserves. Then I called everybody and said, hey, no use wasting money. Stop construction, we aren't going to pay, we'll deed to you Mr. Bank, or you Mr. Developer; neither accepted the offer, and he filed bankruptcy, and has been living in his homesteaded other house ever since.
So, yeah, I think this business is bogus.
Knowing what I know now, I think the bank was really po'ed that we told them and the loan became non performing right away. Or, maybe it didn't; maybe they just continued to pay themselves.
On a huge comm'l scale, I shuddered to think what's covered up. . .
My client was a truly ruthless defaulter, but really, he would have lost everything had he not been. Morally, I don't know what to make of this. It was legal. . .
ac: Anybody seeing something similar where they live?
I guess those are inferior substitutes for biz travelers.
Where I'm at, they're still building these urban PUDs (with retail at the bottom and HD above it) mostly with city financed renewal breaks. Two months ago, I was like WTF? But now, with $4 gas, they seem tempting. Just remove the young yuppie premium and I might bite.
Near where i live (NJ) they are spraying daycare centers one next to the other. One daycare center has been there [Bright horizons], second is almost built (Children of America), now we see advertisements for a third (Kiddy something) on the same block!
They have put up 8 of these LaQuinta types in my town - Longview TX population 75,000 - in just over 2 years; with new construction on two others almost complete.
There are 2 others scheduled for construction starting early fall this year.
ac, I think this is a perfectly fine structure - but the financial institution is supposed to monitor the projects to make sure they are on schedule and that the property can be sold or leased. Believe it or not, I've heard that many institutions weren't checking.
When the market turns, all these deals go bad at almost the same time - and the noncurrent loans rise rapidly. One day the banks is fine, and a few months later the bank has failed. These can be dangerous loans if they are not managed correctly and the concentration is too high.
This is the true nature of the entire problem facing us today.
The fact that people (and business)could borrow their way out of debt for the last 5 years or more, artifically spiking their FICO, artifically reducing the perception of risk, thus artificially tricking financial institutions into underprice risk, thereby incouraging more borrowing and thus further hiding and underpricing risk.
Risk was getting higher as the price for it was going lower.
That will take awhile to fix.
And it will take longer as long as financial institutions have to compete with loss leaders like FHA and the GSE's, who have been ordered to continue to lose money and underprice risk to delay the inevitable.
"Where I'm at, they're still building these urban PUDs (with retail at the bottom and HD above it) mostly with city financed renewal breaks. Two months ago, I was like WTF? But now, with $4 gas, they seem tempting. Just remove the young yuppie premium and I might bite."
Have a big one like that coming online right now, three blocks from my house and adjacent to our very desirable (but also wild and wooly) downtown area. Very central, you can get a direct bus to anywhere. 55 units, 700-2000 square feet.
I expected disaster, but they cut prices and as of the first week of sales I see "sold" signs in 12 units. We'll see.
ac-
Including an interest reserve for C&D projects is not ponzi finance - respectable, sound lenders, including the one I work for, do it all the time. The simple reason is that the project doesn't produce any cash flow during construction. The decision to build in an interest reserve is based on the lender's judgment of when and for how much the project will be able to permanently refinance for. Sure, a fat interest reserve increases the lender's exposure, but it's by no means "ponzi finance" on its face.
These can be dangerous loans if they are not managed correctly and the concentration is too high.
but isn't that just the rub? the footloose and fancy free lenders like countrywide lent unwisely, forcing the more prudent lenders to either go out of business, to drop their loan standards as low as the bad lenders, or to concentrate in their own back yards...
That is the nature of loss leader strategy.....like say Walmart, so big it could afford to lose money on aselected item, putting those who had to make a profit selling that same item out of business. This is illegal.
However, the govt has ordered FHA and the GSE's to continue to provide a product at prices that mean they lose money.
How in the world is the private sector supposed to come back into the market now?
GSE's went from 40% of the home loan market to 80%. They soon will be 100% if they are allowed to underprice risk.
If you want to fix this...raise rates artificially high...the prices of houses hits bottom today! Then you have a rising housing market again instantly as competetors can come into the market and lend money on rising assets at lower rates than the GSE's.
Dangerous? They should up the interest rate they pay themselves to compensate for the risk. Hell, they should pay themselves part of the principal, too, and amortize it. Then they should re-fi to themselves. Cut out the middleman, what do they need a borrower for?
Basically the lender loans the developer enough to build the project, and then loans the developer the interest payment each month during the development phase.
I simply can not believe the number of talking heads currently out and about chatting up the economy and the number of news ebulletins out today..."Ya, its a bit rough right now but just wait, its not going to be so bad and the economy is just fine"
Sumptin is up...a lot of nervous folks...did Asia's drop fuel some volitility
June 10 (Bloomberg) -- Ford Motor Co. stockholders offered to sell half of the company to billionaire Kirk Kerkorian on growing concern Chief Executive Officer Alan Mulally will fail to restore profit as oil surges and the U.S. economy slows.
Investors tendered 1.02 billion shares, or almost half of Ford's 2.2 billion shares outstanding, to Kerkorian, who will buy 20 million shares at $8.50 apiece. Ford dropped as much as 5.3 percent to $6.02 in New York trading.
I have teh sam experience as Drew. Lake charles, louisiana. 75,000 population with at least 8+ cheap holtels. All the 3 story stick built type. I had assumed the scam was that the 3 story limit allowed them to used cheaper stick built, over steel and concrete.
King - This is a testament to the fine management @ Ford and the financial performance it has had over the last 10 years...Think of the money Kerkorian just saved!
These types of loans explain why towers continue to go up even as the last ones sit empty. What incentive (in the short run) does a bank have to tell the builder to stop when the loan is performing? Actually, I wonder if the bank even CAN call back the loan so long as the interest is being paid (with the banks money, of course) and construction is progress according to plan.
LawyerLiz wrote: "Knowing what I know now, I think the bank was really po'ed that we told them and the loan became non performing right away. Or, maybe it didn't; maybe they just continued to pay themselves."
In the early 80's recession I had arranged a construction loan for a condominium project where the developer had a large equity so the loan included a 12 mos. interest reserve. Since we also recognized that the marketability required oversight, the loan commitment also required lender approval of the sales organization selected and the use of a takeout commitment which required developer financing concessions.
The developer then chose a realtor who had no experience in project marketing, used amateur advertising, and was not offering financing under the terms of the loan commitment.
Since this constituted a default under the loan agreement I informed the lender who refused to take any action saying, "I have lots of projects with more problems than this one." They continued to pay themselves out of their interest reserve until it ran out.
I have teh sam experience as Drew. Lake charles, louisiana. 75,000 population with at least 8+ cheap holtels. All the 3 story stick built type. I had assumed the scam was that the 3 story limit allowed them to used cheaper stick built, over steel and concrete.
That's what amazed me at first.
One was 4 stories I believe (I'm not sure if the top floor was just decorative or not) and the thing was built entirely of wood. I thought they stopped doing that the last time Moscow burnt entirely to the ground.
average joe-
Fannie, and to a large extent Freddie act not as originating lenders but as conduits. The buyers of the MBS were the ultimate pricers of risk. Granted, they have an implicit guarantee so MBS buyers will price that in. BUT, in exchange for that guarantee they actually had to have standards (you know, to make loans "conforming"). As a result, they had a more conservative portfolio that didn't explode like the private guys' did. The private labels were the ones putting the sub-prime and class C property pools together at unheard of spreads. So if you want to talk about who was under-pricing risk, the GSEs do not take the blame. But don't worry about the privates, they'll come back strong when real estate heats up again...in a few decades...
BTW they're building those 3 story economy type hotels everywhere around here (La Quinta, Hampton Inn, etc.). There's a new one going up on every street corner.
Yes. In several areas. However, I see more "Suites" than anything else. Always wood structure, 3 stories tall, usually individual A/C's per room. The construction looks to be good for a decade, longer for the 2nd 'non-name brand' owner.
I speculate that these hotels are being leased the land cheap in order to squat on it until the market returns. The buildings simply are not being built to last. They look pretty cheap to demolish too.
Sad thing is that high oil will reduce all forms of travel... I have nothing against the motels/hotels being built. There is a business case for building short life buildings. Funny how many of them are used for multiples of their economic life though...
Like a guy jugeling running chain saws and someone keeps throwing him more. The best thing all these central bankers could do is STFU and do nothing. They won't and the crash they want to avoid will come down on their heads like a ton of crap. Stupid bastards.
There's really nothing wrong with a loan that has no scheduled payments until the project is completed. After all, there's no (or at least very little) money coming in until completion. Expecting regular payments on an investment that has no returns yet is silly. So why use interest reserves to create the illusion of regular payments? THIS is what's suspicious to me.
Financialization has allowed so much money to be created for nothing and now Benny is determined to have them keep it all. Hedge funds financializing farmland and food production ought to turn out great.
Jeeze... No wonder they kept building into the slump... No wonder construction employment took so long to decline... No wonder inventory and months of supply is setting records...
Serious delays in responding to market signals built into this loan structure...
~
BTW they're building those 3 story economy type hotels everywhere around here (La Quinta, Hampton Inn, etc.). There's a new one going up on every street corner.
Better watch out - what happens when they can't rent the rooms on a nightly basis to budget travelers? They rent them on a weekly basis to budget tenants. And because no one really monitors this stuff, they become low-cost semi-permanent housing.
Barley writes:
King - This is a testament to the fine management @ Ford and the financial performance it has had over the last 10 years...
what cracks me up is the image from trading places when kevin bacon stands up and puts a hi bid on paper and everyone is a SELLER! in this case though, it ain't so good.
ICAP will launch the New York Funding Rate, a benchmark for short-term bank borrowing costs on Wednesday, the interdealer broker said on Tuesday.
The daily NYFR poll to set the rate "will be conducted during the New York morning when the Eurodollar market is most active," said ICAP in a statement. The survey will ask banks for market rates as of 9:15 a.m. EDT, while the results will be calculated by 10 a.m. and disseminated shortly after that, ICAP said.
Some market participants have called for an alternative U.S. rate benchmark to the London interbank offered rate (Libor) because Libor's reliability has been questioned during the current global credit crisis.
On an anonymous basis, banks will be asked to submit a representative rate for where an institution would be likely to obtain funding in the market, rather than report on their own costs that morning, ICAP said. The number of contributors will vary, but at least 16 participants each day will be needed in order to publish the rate.
Yes. In several areas. However, I see more "Suites" than anything else. Always wood structure, 3 stories tall, usually individual A/C's per room. The construction looks to be good for a decade, longer for the 2nd 'non-name brand' owner.
Actually, that's exactly what I'm seeing too, though I'm not sure about the individual ACs.
"Better watch out - what happens when they can't rent the rooms on a nightly basis to budget travelers? They rent them on a weekly basis to budget tenants. And because no one really monitors this stuff, they become low-cost semi-permanent housing."
Make 'em into single-room occupancy senior housing, and no one will say a thing. There may be a real demand for SRO hotel living when this is all over.
I just wanted to give everyone a heads up about our LTV/CLTV'S and other new guidelines that are coming out; If you fax in your submission today and any loans already in the system will be honored. If you send in a submission today and the 1003 is not completed properly or missing info the file will not be processed in our system and therefore not honored for today. Please look over your submissions carefully to ensure it gets through.
The 5 declining market states NV,FL,AZ,CA, and MI are now capped at 75% LTV/CLTV
All other non-declining states for refinances will be 90% and for purchases are capped at 85% CLTV
Stand alone seconds for all other non-declining states are capped at 85% CLTV
If over 80%, no cash out but if debt consolidation max non-mortgage debt to payoff is $20,000
Applicant must be in home 2 years if CLTV is over 80%. Less than 80% does not apply
Heloc 1st still capped at 80% but loan amount raised to $350,000 loan amount
DTI has been reduced to 45% for all products except for fixed refinance first mortgages which are still 50%. "
One of the few high LTV portfolio lenders left for California is now gone. I'm really really suprised it took them this long. It is Fannie/Freddie or FHA for most borrowers.
I recently reviewed an offering of performing loans from Indy Mac. They were offering approx. $500MM+ of what they called performing loans. Actually, they were construction and A&D loans that were still being funded by interest reserves. Most of the projects were stalled. The WSJ reported that the portfolio sold for about sixty cents on the dollar with some loans going for .20.
after Katrina FEMA put up thousands of welfare people in hotels for months. I know a couple a low rent indian hotel owners who made out like bandidts. They made enough money in 6 months to pay off their mortgages, and send lots back home for investments. The daily gunfire was a small problem...
After grading was done early 2007 on 2 shopping centers and 5 plus gated SFH tracts, construction was cancelled, everything but the gravel piles and water trucks was removed, and signs were changed to 'Opening 2009'.
I thought it was a good call then, and considering how many billions some other professional bigshots bet and lost through the end of 2007 it looks like a great call.
Biking 10 miles/day I know every light and traffic trick, but the thundering herd, 6 liter carbon footprint crowd must be off-roading: everyday is like Sunday.
There is a shopping center in Aurora Il being built with Whole Foods as the anchor tenant, across the street from a Costco. The question is, do you want free range chicken, or, the barbequed ones for $6.49 at Costco. The only other tenants so far are a sneaker store, and a chicken wings franchise. I think I see the tumbleweeds coming.
Not far from me there is a fairly-new strip mall that has been half empty. Within a quarter of a mile there are THREE more strip malls under construction, and new homebuilding has nearly stopped.
I suspect the developers have interest-reserve loans and they figure they have nothing to lose by completing the projects and hoping for a miracle. If they stop now, they'll have to declare BK anyway. So why not finish the projects and hope that the economy will revive by the end of the year? If the economy is still in the tank when the project is built and the interest runs out, use the BK option then.
To an economist this looks like moral-hazard wealth destruction. To the developer it was just a deal that didn't pan out. I hope the loan officer doesn't get a fat bonus.
FWIW, every single unstabilized loan that I have written has come with an interest reserve.
The idea is that the lender doesn't need to rely on the borrower to come out pocket to make interest payments. Once the project is complete, it should be worth more than the total loan (including the interest reserve) and equity put in the deal.
The problem is that too many deals were being done to overly aggressive cap rates or with overly aggressive lease-up / sell-out assumptions.
I know the project, even if a good idea, won't be generating any money for a while.
But if you charge just a little bit of interest, and the developer doesn't have the wherewithall to pay that, isn't that a signal? But we don't want to know we are in trouble until we are in so much trouble that the whole system is threatening to go down.
I think the biggie wigs have lied so much to so many people that the really do believe their own lies.
And we are getting to the point that they can't believe the lies any more, hence the nervousness and fear, and they try to supress what they know deed down to be true.
Also, my practice is in the very dense basically Cuban city of Hialeah.
Normally any strip mall is quickly filled up. There's an addition to a filled strip mall near me, that is a shell sitting vacant waiting for the insides to be built. And waiting. .
Next time around (and there will be a next time) I'm gonna have to think bigger with other people's money.
Don't stop with consumer or commercial goods, see if you buy your own "statehood" or "sovereignty". Some of these cash-strapped nations would probably sell you the land along with the ability to form your own country.
Oh boy!
LEH is down again today!
Basically the lender loans the developer enough to build the project, and then loans the developer the interest payment each month during the development phase.
Haha... this sounds like pure ponzi finance.
Any time the borrower has to borrow the interest payment then by definition that's exactly what you've got.
BTW they're building those 3 story economy type hotels everywhere around here (La Quinta, Hampton Inn, etc.). There's a new one going up on every street corner.
It's like somebody got a big can of hotel spray and is covering the city in it.
Anybody seeing something similar where they live?
Not Ponzi. Option ARMs for developers.
If the developer has a takeout in place and has skin in the game, I see no problem with this. It is a cash management tool.
That said, a lot of developement, mostly shopping centers, were built with a negative (near term) cap rate. The idea was to increase occupancy and rents over time while the real estate appreciated. That model is el busto.
It is possible for the FDIC to declare a loan non performing even when no payments have been missed. It is simply called a proforming, non proforming loan. It happened to me in 1990. FDIC can be rather doltish at times.
ac:
here in Mpls we're seeing mainly high end hotels.
A westin just opened, another one is in construction, a W is under construction, and 2 luxury private hotels recently opened.
there are a few more high end hotels opening up soon too...
I don't see what's wrong with these interest reserves... they worked really well for Harry Macklowe. not to mention how well they've worked in residential real estate (option ARMs).
Sorry for the spelling in the last post and yes ac, those damn hotels are everywhere.
Interesting article, CR. Thanks. Let's hear it for commercial-sized option ARMs!
A marginally related question: do credit unions also make C&D/CRE loans? If so, are they likely to be as strongly affected as regular banks?
This would have happened to the bank of a client of mine who was having a house built on the west coast of Florida aka the inner circle of doom.
Tragically, his son in law was killed in a car accident, his daughter moved back to Florida's east coast, he couldn't find a decent job. He walked away, bought another house, credit was good while the Interest was being paid due to interest reserves. Then I called everybody and said, hey, no use wasting money. Stop construction, we aren't going to pay, we'll deed to you Mr. Bank, or you Mr. Developer; neither accepted the offer, and he filed bankruptcy, and has been living in his homesteaded other house ever since.
So, yeah, I think this business is bogus.
Knowing what I know now, I think the bank was really po'ed that we told them and the loan became non performing right away. Or, maybe it didn't; maybe they just continued to pay themselves.
On a huge comm'l scale, I shuddered to think what's covered up. . .
My client was a truly ruthless defaulter, but really, he would have lost everything had he not been. Morally, I don't know what to make of this. It was legal. . .
ac:
Anybody seeing something similar where they live?
I guess those are inferior substitutes for biz travelers.
Where I'm at, they're still building these urban PUDs (with retail at the bottom and HD above it) mostly with city financed renewal breaks. Two months ago, I was like WTF? But now, with $4 gas, they seem tempting. Just remove the young yuppie premium and I might bite.
Near where i live (NJ) they are spraying daycare centers one next to the other. One daycare center has been there [Bright horizons], second is almost built (Children of America), now we see advertisements for a third (Kiddy something) on the same block!
AC,
Re: economy hotels
They have put up 8 of these LaQuinta types in my town - Longview TX population 75,000 - in just over 2 years; with new construction on two others almost complete.
There are 2 others scheduled for construction starting early fall this year.
ac, I think this is a perfectly fine structure - but the financial institution is supposed to monitor the projects to make sure they are on schedule and that the property can be sold or leased. Believe it or not, I've heard that many institutions weren't checking.
When the market turns, all these deals go bad at almost the same time - and the noncurrent loans rise rapidly. One day the banks is fine, and a few months later the bank has failed. These can be dangerous loans if they are not managed correctly and the concentration is too high.
Best Wishes.
This is the true nature of the entire problem facing us today.
The fact that people (and business)could borrow their way out of debt for the last 5 years or more, artifically spiking their FICO, artifically reducing the perception of risk, thus artificially tricking financial institutions into underprice risk, thereby incouraging more borrowing and thus further hiding and underpricing risk.
Risk was getting higher as the price for it was going lower.
That will take awhile to fix.
And it will take longer as long as financial institutions have to compete with loss leaders like FHA and the GSE's, who have been ordered to continue to lose money and underprice risk to delay the inevitable.
"Where I'm at, they're still building these urban PUDs (with retail at the bottom and HD above it) mostly with city financed renewal breaks. Two months ago, I was like WTF? But now, with $4 gas, they seem tempting. Just remove the young yuppie premium and I might bite."
Have a big one like that coming online right now, three blocks from my house and adjacent to our very desirable (but also wild and wooly) downtown area. Very central, you can get a direct bus to anywhere. 55 units, 700-2000 square feet.
I expected disaster, but they cut prices and as of the first week of sales I see "sold" signs in 12 units. We'll see.
More on LEH for those interested :
Lehman's Property Bets
Are Coming Back to Bite
Lehman's Property Bets Are Coming Back to Bite - WSJ.com
ac-
Including an interest reserve for C&D projects is not ponzi finance - respectable, sound lenders, including the one I work for, do it all the time. The simple reason is that the project doesn't produce any cash flow during construction. The decision to build in an interest reserve is based on the lender's judgment of when and for how much the project will be able to permanently refinance for. Sure, a fat interest reserve increases the lender's exposure, but it's by no means "ponzi finance" on its face.
Anybody seeing something similar where they live?
ac | 06.10.08 - 1:22 pm | #
One done,4 more gettin tossed up right now. Exit 170/I75,Florida. We are not a business hub so I have no idea where support will come from.
Not to mention the 300k sq ft in commercial buildings that are empty one exit before.
There was an article that mentioned we had 10+ years of vacant commercial in our county at 2005-06 rental rates. I guess it's even more now.
Chris
These can be dangerous loans if they are not managed correctly and the concentration is too high.
but isn't that just the rub? the footloose and fancy free lenders like countrywide lent unwisely, forcing the more prudent lenders to either go out of business, to drop their loan standards as low as the bad lenders, or to concentrate in their own back yards...
Yearning....you hit it on the head!
It was a world where you underprice risk or die.
That is the nature of loss leader strategy.....like say Walmart, so big it could afford to lose money on aselected item, putting those who had to make a profit selling that same item out of business. This is illegal.
However, the govt has ordered FHA and the GSE's to continue to provide a product at prices that mean they lose money.
How in the world is the private sector supposed to come back into the market now?
GSE's went from 40% of the home loan market to 80%. They soon will be 100% if they are allowed to underprice risk.
If you want to fix this...raise rates artificially high...the prices of houses hits bottom today! Then you have a rising housing market again instantly as competetors can come into the market and lend money on rising assets at lower rates than the GSE's.
Dangerous? They should up the interest rate they pay themselves to compensate for the risk. Hell, they should pay themselves part of the principal, too, and amortize it. Then they should re-fi to themselves. Cut out the middleman, what do they need a borrower for?
Basically the lender loans the developer enough to build the project, and then loans the developer the interest payment each month during the development phase.
The ultimate Neg-Am loan!
One done,4 more gettin tossed up right now. Exit 170/I75,Florida. We are not a business hub so I have no idea where support will come from.
Yeah, that's what I'm noticing here. It seems like they're building them because the money is (was) there, not because they're needed.
Some of the local business publications are saying the business outlook is quite negative now due to the decline in real estate.
BTW anybody notice the irony that during the most critical time of the year for a very sick housing market we're getting this:
<a href="http://www.marketwatch.com/tools/quotes/intchart.asp?symb=TNX&sid=11420&dist=TQP_chart_date&freq=1&time=7>TNX
Shame, shame, shame...
O/T
I simply can not believe the number of talking heads currently out and about chatting up the economy and the number of news ebulletins out today..."Ya, its a bit rough right now but just wait, its not going to be so bad and the economy is just fine"
Sumptin is up...a lot of nervous folks...did Asia's drop fuel some volitility
June 10 (Bloomberg) -- Ford Motor Co. stockholders offered to sell half of the company to billionaire Kirk Kerkorian on growing concern Chief Executive Officer Alan Mulally will fail to restore profit as oil surges and the U.S. economy slows.
Investors tendered 1.02 billion shares, or almost half of Ford's 2.2 billion shares outstanding, to Kerkorian, who will buy 20 million shares at $8.50 apiece. Ford dropped as much as 5.3 percent to $6.02 in New York trading.
hey guys, he only wanted 20 million
where's bizarro world... this fits
ac,
I have teh sam experience as Drew. Lake charles, louisiana. 75,000 population with at least 8+ cheap holtels. All the 3 story stick built type. I had assumed the scam was that the 3 story limit allowed them to used cheaper stick built, over steel and concrete.
King - This is a testament to the fine management @ Ford and the financial performance it has had over the last 10 years...Think of the money Kerkorian just saved!
Looks like the 2 o'clock Puke-Out Express is right on time.
It's funny how the name of the train changes once the Big Boys wanna bring everything down.
These types of loans explain why towers continue to go up even as the last ones sit empty. What incentive (in the short run) does a bank have to tell the builder to stop when the loan is performing? Actually, I wonder if the bank even CAN call back the loan so long as the interest is being paid (with the banks money, of course) and construction is progress according to plan.
TNX/FVX are rocketing.
Time is running out quickly for the Fed.
LawyerLiz wrote: "Knowing what I know now, I think the bank was really po'ed that we told them and the loan became non performing right away. Or, maybe it didn't; maybe they just continued to pay themselves."
In the early 80's recession I had arranged a construction loan for a condominium project where the developer had a large equity so the loan included a 12 mos. interest reserve. Since we also recognized that the marketability required oversight, the loan commitment also required lender approval of the sales organization selected and the use of a takeout commitment which required developer financing concessions.
The developer then chose a realtor who had no experience in project marketing, used amateur advertising, and was not offering financing under the terms of the loan commitment.
Since this constituted a default under the loan agreement I informed the lender who refused to take any action saying, "I have lots of projects with more problems than this one." They continued to pay themselves out of their interest reserve until it ran out.
GP - Thus explaining how you can make money and then make more money right up until the time all the money is gone.
I'm looking forward to the 3 for the price of 1 condo deals. I'm thinking a Miami-Chicago-Seattle package might get me interested.
I have teh sam experience as Drew. Lake charles, louisiana. 75,000 population with at least 8+ cheap holtels. All the 3 story stick built type. I had assumed the scam was that the 3 story limit allowed them to used cheaper stick built, over steel and concrete.
That's what amazed me at first.
One was 4 stories I believe (I'm not sure if the top floor was just decorative or not) and the thing was built entirely of wood. I thought they stopped doing that the last time Moscow burnt entirely to the ground.
I'm thinking a Miami-Chicago-Seattle package might get me interested.
Good idea. You can compare and contrast souplines.
average joe-
Fannie, and to a large extent Freddie act not as originating lenders but as conduits. The buyers of the MBS were the ultimate pricers of risk. Granted, they have an implicit guarantee so MBS buyers will price that in. BUT, in exchange for that guarantee they actually had to have standards (you know, to make loans "conforming"). As a result, they had a more conservative portfolio that didn't explode like the private guys' did. The private labels were the ones putting the sub-prime and class C property pools together at unheard of spreads. So if you want to talk about who was under-pricing risk, the GSEs do not take the blame. But don't worry about the privates, they'll come back strong when real estate heats up again...in a few decades...
ac writes:
BTW they're building those 3 story economy type hotels everywhere around here (La Quinta, Hampton Inn, etc.). There's a new one going up on every street corner.
Yes. In several areas. However, I see more "Suites" than anything else. Always wood structure, 3 stories tall, usually individual A/C's per room. The construction looks to be good for a decade, longer for the 2nd 'non-name brand' owner.
I speculate that these hotels are being leased the land cheap in order to squat on it until the market returns. The buildings simply are not being built to last. They look pretty cheap to demolish too.
Sad thing is that high oil will reduce all forms of travel... I have nothing against the motels/hotels being built. There is a business case for building short life buildings. Funny how many of them are used for multiples of their economic life though...
Got Popcorn?
Neil
OT: WM is making a huge rebound, but LEH is down 9%.
"Time is running out quickly for the Fed."
Like a guy jugeling running chain saws and someone keeps throwing him more. The best thing all these central bankers could do is STFU and do nothing. They won't and the crash they want to avoid will come down on their heads like a ton of crap. Stupid bastards.
There's really nothing wrong with a loan that has no scheduled payments until the project is completed. After all, there's no (or at least very little) money coming in until completion. Expecting regular payments on an investment that has no returns yet is silly. So why use interest reserves to create the illusion of regular payments? THIS is what's suspicious to me.
Financialization has allowed so much money to be created for nothing and now Benny is determined to have them keep it all. Hedge funds financializing farmland and food production ought to turn out great.
Jeeze... No wonder they kept building into the slump... No wonder construction employment took so long to decline... No wonder inventory and months of supply is setting records...
Serious delays in responding to market signals built into this loan structure...
~
BTW they're building those 3 story economy type hotels everywhere around here (La Quinta, Hampton Inn, etc.). There's a new one going up on every street corner.
Better watch out - what happens when they can't rent the rooms on a nightly basis to budget travelers? They rent them on a weekly basis to budget tenants. And because no one really monitors this stuff, they become low-cost semi-permanent housing.
Ha,
check-out the Fannie-mae coupons.
Bloomberg.com:
Personal Finance
things are not getting better.
Correct me if I'm wrong, but isn't it a normal CRE structure to create an interest reserve on a construction loan?
I think the reporting of the use of these reserves, and the continued use of the reserves after construction is complete, that is the issue.
Barley writes:
King - This is a testament to the fine management @ Ford and the financial performance it has had over the last 10 years...
what cracks me up is the image from trading places when kevin bacon stands up and puts a hi bid on paper and everyone is a SELLER! in this case though, it ain't so good.
ICAP will launch the New York Funding Rate, a benchmark for short-term bank borrowing costs on Wednesday, the interdealer broker said on Tuesday.
The daily NYFR poll to set the rate "will be conducted during the New York morning when the Eurodollar market is most active," said ICAP in a statement. The survey will ask banks for market rates as of 9:15 a.m. EDT, while the results will be calculated by 10 a.m. and disseminated shortly after that, ICAP said.
Some market participants have called for an alternative U.S. rate benchmark to the London interbank offered rate (Libor) because Libor's reliability has been questioned during the current global credit crisis.
On an anonymous basis, banks will be asked to submit a representative rate for where an institution would be likely to obtain funding in the market, rather than report on their own costs that morning, ICAP said. The number of contributors will vary, but at least 16 participants each day will be needed in order to publish the rate.
ICAP to launch New York Funding Rate on Wednesday
| Reuters
Going to ask the same lying banks a different question Otay.
Wow An add for Scientology Video channel on CR??
Is it just me?
Do you all sense some incredible amount of fear, uncertainty, doubt by the Feb and Treasury today?
Yes. In several areas. However, I see more "Suites" than anything else. Always wood structure, 3 stories tall, usually individual A/C's per room. The construction looks to be good for a decade, longer for the 2nd 'non-name brand' owner.
Actually, that's exactly what I'm seeing too, though I'm not sure about the individual ACs.
"Better watch out - what happens when they can't rent the rooms on a nightly basis to budget travelers? They rent them on a weekly basis to budget tenants. And because no one really monitors this stuff, they become low-cost semi-permanent housing."
Make 'em into single-room occupancy senior housing, and no one will say a thing. There may be a real demand for SRO hotel living when this is all over.
Looks like US Bank finally said uncle:
"Hello everyone,
I just wanted to give everyone a heads up about our LTV/CLTV'S and other new guidelines that are coming out; If you fax in your submission today and any loans already in the system will be honored. If you send in a submission today and the 1003 is not completed properly or missing info the file will not be processed in our system and therefore not honored for today. Please look over your submissions carefully to ensure it gets through.
The 5 declining market states NV,FL,AZ,CA, and MI are now capped at 75% LTV/CLTV
All other non-declining states for refinances will be 90% and for purchases are capped at 85% CLTV
Stand alone seconds for all other non-declining states are capped at 85% CLTV
If over 80%, no cash out but if debt consolidation max non-mortgage debt to payoff is $20,000
Applicant must be in home 2 years if CLTV is over 80%. Less than 80% does not apply
Heloc 1st still capped at 80% but loan amount raised to $350,000 loan amount
DTI has been reduced to 45% for all products except for fixed refinance first mortgages which are still 50%. "
One of the few high LTV portfolio lenders left for California is now gone. I'm really really suprised it took them this long. It is Fannie/Freddie or FHA for most borrowers.
15:23 OFHEO rule change may boost future reported losses at FNM, FRE- Bloomberg
Fannie Mae (FNM) and Freddie Mac (FRE) capital needs likely to rise.
I recently reviewed an offering of performing loans from Indy Mac. They were offering approx. $500MM+ of what they called performing loans. Actually, they were construction and A&D loans that were still being funded by interest reserves. Most of the projects were stalled. The WSJ reported that the portfolio sold for about sixty cents on the dollar with some loans going for .20.
There will be more people on welfare, and these stick built 3 story LaQuintas will be their new "hotel." I gather the government pays high rents.
after Katrina FEMA put up thousands of welfare people in hotels for months. I know a couple a low rent indian hotel owners who made out like bandidts. They made enough money in 6 months to pay off their mortgages, and send lots back home for investments. The daily gunfire was a small problem...
After grading was done early 2007 on 2 shopping centers and 5 plus gated SFH tracts, construction was cancelled, everything but the gravel piles and water trucks was removed, and signs were changed to 'Opening 2009'.
I thought it was a good call then, and considering how many billions some other professional bigshots bet and lost through the end of 2007 it looks like a great call.
Biking 10 miles/day I know every light and traffic trick, but the thundering herd, 6 liter carbon footprint crowd must be off-roading: everyday is like Sunday.
There is a shopping center in Aurora Il being built with Whole Foods as the anchor tenant, across the street from a Costco. The question is, do you want free range chicken, or, the barbequed ones for $6.49 at Costco. The only other tenants so far are a sneaker store, and a chicken wings franchise. I think I see the tumbleweeds coming.
Not far from me there is a fairly-new strip mall that has been half empty. Within a quarter of a mile there are THREE more strip malls under construction, and new homebuilding has nearly stopped.
I suspect the developers have interest-reserve loans and they figure they have nothing to lose by completing the projects and hoping for a miracle. If they stop now, they'll have to declare BK anyway. So why not finish the projects and hope that the economy will revive by the end of the year? If the economy is still in the tank when the project is built and the interest runs out, use the BK option then.
To an economist this looks like moral-hazard wealth destruction. To the developer it was just a deal that didn't pan out. I hope the loan officer doesn't get a fat bonus.
FWIW, every single unstabilized loan that I have written has come with an interest reserve.
The idea is that the lender doesn't need to rely on the borrower to come out pocket to make interest payments. Once the project is complete, it should be worth more than the total loan (including the interest reserve) and equity put in the deal.
The problem is that too many deals were being done to overly aggressive cap rates or with overly aggressive lease-up / sell-out assumptions.
And here we are.
I know the project, even if a good idea, won't be generating any money for a while.
But if you charge just a little bit of interest, and the developer doesn't have the wherewithall to pay that, isn't that a signal? But we don't want to know we are in trouble until we are in so much trouble that the whole system is threatening to go down.
I think the biggie wigs have lied so much to so many people that the really do believe their own lies.
And we are getting to the point that they can't believe the lies any more, hence the nervousness and fear, and they try to supress what they know deed down to be true.
Also, my practice is in the very dense basically Cuban city of Hialeah.
Normally any strip mall is quickly filled up. There's an addition to a filled strip mall near me, that is a shell sitting vacant waiting for the insides to be built. And waiting. .
If the bank loans you all the money to build the project and they front you the carrying costs, what are you risking?
Seems to me like commercial loans also were no money down.
Next time around (and there will be a next time) I'm gonna have to think bigger with other people's money.
Next time around (and there will be a next time) I'm gonna have to think bigger with other people's money.
Don't stop with consumer or commercial goods, see if you buy your own "statehood" or "sovereignty". Some of these cash-strapped nations would probably sell you the land along with the ability to form your own country.